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Evaluating PEMEX's Drilling Expansion to Combat Declining Oil ReservesNicholas NigroGoldman School of Public PolicyUniversity of California, BerkeleyA project partnering the University of
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A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Evaluating PEMEX's Drilling Expansion to Combat Declining Oil Reserves
Nicholas NigroGoldman School of Public PolicyUniversity of California, Berkeley
A project partnering the University of California at Berkeley and Global EESE, a globally collaborative, distributive foresight network initiated by the U.S. Department of Energy
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Presentation Overview
PEMEX Overview
ProblemGovernment dependency on PEMEX revenue
Decline in oil reserves since mid 1980s
Decline in oil production since 2004
Analysis of Drilling Expansion Policy
Final Recommendations
Future Work
Note: All data presented from PEMEX and U.S. EIA
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Acknowledgements
Dan Milstein and Carol Dumaine, U.S. Department of EnergyDan Kammen, University of California-BerkeleyArmand Peschard, Center for Strategic and International StudiesMatthew Rodrigues, Natural gas trader from private sector
UC-Berkeley faculty and colleagues: Candace Hamilton, Blas Perez Henriquez, Rucker Johnson, Steven Raphael, and Armando Salcedo
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
PEMEX Overview
Latin Americas largest company
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
PEMEX Overview
Mexicos national oil and gas company
Nationalization of hydrocarbon sector in 1938
Supports the entire production chain
16th largest proven oil reserves in world
3rd largest supplier of oil to U.S.
High Federal taxes on revenue (not profits)
Historically little autonomy
Historically high profits (before tax) and low investment since oil was easy to extract
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
PEMEX Objective
Maximize hydrocarbons and by-products economic value, contributing to the sustainable
development of the country
PEMEXs forecasts 100% reserve replacement rate by 2012
PEMEX must address: labor relations and negotiations, transparency, efficiency, and financial stability
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Project Problem
Government dependency on PEMEX revenue and diminishing oil reserves and production
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
An Imminent Energy Problem
40% of government revenue is from taxes on PEMEX
Oil reserves have been declining since the mid 1980s
PEMEXs answer in 2000: Expand Drilling
Oil production has fallen sharply since 2004
Net importer of oil by 2020 according to U.S. EIA
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Federal Government Revenue
36%30% 33%
36%40%
43%
38% 42%
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
2000 2001 2002 2003 2004 2005 2006 2007
Millio
n P
es
os
Non-PEMEX Tax Revenue Tax on Pemex
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Oil On The Decline
0
200
400
600
800
1000
1200
1400
0
10000
20000
30000
40000
50000
60000
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Oil p
rod
uc
tio
n (
milli
on
ba
rre
ls)
Oil r
es
erv
es
(m
illi
on
ba
rre
ls)
Oil reserves (million barrels) Oil production (million barrels)
2008 production
level is same as 1984
but revenues are
substantially higher
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Drilling Expansion Since 2000
600
650
700
750
800
850
900
950
1000
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007
BO
E p
er
day
We
lls
Wells completed Oil production by well
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Drilling Expansion Policy Analysis
Evaluate policy effectiveness to determine path forward
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Analysis Overview
Drilling Expansion Policy Definition
Policy Criteria
Revisiting Moroney-Assad analysis
Sustainability evaluation using econometric models
Cost-benefit analysis of drilling expansion
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Drilling Policy Expansion
Oil production increases mandated by President Vicente Fox in 2000; support continues with current President Calderon
Huge increases in drilling for exploration and development since 2000
Production losses at Cantarell have led to steep production declines since 2004
New oil is not being found at a rate fast enough to replace extracted oil
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Policy Criteria
PEMEXs Fiscal State
Energy Reform in 2008
Mexicos Energy Forecast
U.S. Energy Policy Changes
Political Barriers
Economic Limitations
Technological Limitations
Historical Perspective
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
PEMEX Revenue Allocation
62.7% 59.2% 61.0%61.1%
61.3%
62.5%54.9%
59.6%
58.1%
-200000
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Millio
n P
es
os
Operating Costs Tax Costs Net Loss Note: % is percentageof revenue that is taxed
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Energy Reform In 2008
Program for Growth and EmploymentUse nearly all funds from Stabilization Fund for Oil Income Investment to build a new refinery
Petroleos Mexicanos LawPublic works and service contracts: allow for more partnershipsCitizen Bonds: finance debtDebt: greater autonomy for establishing debtBudget: PEMEX can make budget adjustments without approvalNational Suppliers: Preference for Mexican suppliers
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Moroney-Assad Analysis
From Energy and Sustainable Development in Mexico from 2005
Used data from 1975-2000
Evaluated econometric models forExploration and Developmental Drilling
Successful Exploration and Development
Additions to Oil Reserves
Oil Production
Models revisited to include 2000-2008 data
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Model Summary through 2000
Total Drilling
Net Mexican oil export price predicts drilling
Drilling Success Ratio
More drilling increases success ratio
OilReserves
More drilling adds to reserves
Oil Production
Production depends on reserve levels
Moroney-Assad Conclusions
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Model Summary through 2000
Total Drilling
Net Mexican oil export price predicts drilling
Drilling Success Ratio
More drilling increases success ratio
OilReserves
More drilling adds to reserves
Oil Production
Production depends on reserve levels
Moroney-Assad Conclusions
Model Summary through 2008 Still Significant
Total Drilling
Unable to reproduce original modelDebt financing funds 95% of drilling
NO
Drilling Success Ratio
Developmental drilling reached plateauExploration drilling ratio still increasing
YES
OilReserves
Drilling expansion only marginally successful
NO
Oil Production
Oil reserves still accurately predict production levels
YES
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Sustainability Evaluation
Three areas of focusOil reserves
Operational costs
Marginal cost per barrel of oil
Econometric models and correlations establish relationships with areas of focus
Comparing 2000-2008 versus business-as-usual evaluates effectiveness of drilling expansion for oil reserves
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Oil Reserves And Wells Drilled
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
30000
32000
34000
36000
38000
40000
42000
44000
46000
To
tal S
uc
ce
ssfu
l W
ells
Dri
lle
d
Oil r
es
erv
es
(m
illio
n b
arr
els
)
Total successful wells drilled Oil reserves (million barrels)
Inverse Relationship: Correlation coefficient of -0.98 since 1993
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Oil Reserves And Employee Count
30000
32000
34000
36000
38000
40000
42000
44000
46000
48000
50000
30000
32000
34000
36000
38000
40000
42000
44000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Nu
mb
er
of
Em
plo
ye
es
Oil r
es
erv
es
(m
illi
on
ba
rre
ls)
Pemex-Exploration and Production Employee Count Oil reserves (million barrels)
Strong Relationship: Correlation coefficient of -0.99 since 1996
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Marginal Cost And Employee Count
150
200
250
300
350
400
450
500
550
30000
32000
34000
36000
38000
40000
42000
44000
46000
48000
50000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pe
so
s pe
r b
arr
el o
f o
il
Em
plo
ye
e C
ou
nt
Production and Exploration Employee Count Operating Cost Rate (pesos/barrel)
Statistically significant correlation between employee count and operating cost rate
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Oil Reserves Evaluation
-4.24%
-5.67%-4.93% -1.59%
-0.94%1.35% 5.17%
25000.00
27000.00
29000.00
31000.00
33000.00
35000.00
37000.00
39000.00
41000.00
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil R
es
erv
es
(m
illi
on
s o
f b
arr
els
)
Oil Reserves (forecast) Oil Reserves (actual) R2 value of 0.68
Net oil reserve gain of 2019 million barrels from 2000-2008
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Oil Production Evaluation
R2 value of 0.45
1.29%
4.77%
6.37%
12.78%13.11%
11.37%
8.70%
2.62%
-6.92%1000.00
1050.00
1100.00
1150.00
1200.00
1250.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil R
es
erv
es
(m
illi
on
s o
f b
arr
els
)
Oil Production (forecast) Oil Production (actual)
Net gain of 733 million barrels from 2000-2008
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Sustainability Evaluation Summary
Diminishing rate of return for each new well drilled
Increasing marginal cost per barrel may prevent some oil from being extracted
Marginal success for drilling expansion Rate of oil reserve decline has lessened since 2000
Higher production than business-as-usual
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Cost-Benefit Analysis
Use total sales for benefits and total operational costs for costs
Using company-wide numbers accounts for benefits and costs in refining and other subsidiaries of PEMEX
Project business as usual using data from 1990-1999
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Operational Costs
0.59%0.68%
-10.15%
8.51%
10.95%
36.99%
46.35%
51.84%
108.88%
200000.00
300000.00
400000.00
500000.00
600000.00
700000.00
800000.00
900000.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Op
era
tio
na
l C
osts
(m
illi
on
s o
f p
es
os
)
Total Operational Costs (forecast) Total Operational Costs (actual)
Year
Operational
Costs(million pesos)
2000 1,718.90
2001 1,988.64
2002 0.00
2003 27,631.06
2004 37,700.95
2005 130,855.04
2006 172,370.50
2007 200,380.68
2008 449,639.75
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Sales Benefits
7.87%
-6.02%-7.89%
10.47%
24.89%
39.70%
48.12%47.36%
56.42%
400000.00
500000.00
600000.00
700000.00
800000.00
900000.00
1000000.00
1100000.00
1200000.00
1300000.00
1400000.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
To
tal S
ale
s (
mil
lio
ns
o
f p
es
os
)
Total Sales (forecast) Total Sales (actual)
YearSales Benefit(million pesos)
2000 54,067.92
2001 0.00
2002 0.00
2003 79,863.32
2004 225,916.43
2005 411,319.54
2006 552,012.89
2007 558,300.70
2008 749,770.63
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Cost-Benefit Summary
Year Accumulated Benefit(million pesos)
2000 687,004.86
2001 599,625.62
2002 620,922.21
2003 763,133.92
2004 907,783.10
2005 1,035,970.21
2006 1,147,093.83
2007 1,178,750.95
2008 1,328,950.00
Drilling expansion provided millions of additional pesos in revenue for PEMEX
Much of the additional revenue is due to high oil prices from 2004-2008
Financial crisis of 2008 could lessen benefit significantly in 2010
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Final Recommendations
Defining a path forward for drilling at PEMEX
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
1. Parntnerships to Change Political Will
ProblemDeficient technological capabilityEconomically inefficient policies
SolutionIncrease collaborations and communication with other national oil companies like Petrobras and StatoilHydroLearn implementation of effective policies that improve social welfare and productivity of national oil industry
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Parntnerships to Change Political Will (Cont.)
PEMEX undertakes massive public advertising
campaign highlighting partnerships with
Petrobras and StatOilHydro
Mexican government holds joint conference with Brazil
and Norway to discuss public polices related to the hydrocarbon sector
Assessment of political will for further reform of hydrocarbon sector
including law changes to allow PEMEX to operate
more efficiently
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
2. Continue Drilling Expansion
ProblemDeclining oil reserves and production
Increasing operational costs and marginal cost per barrel of oil
SolutionContinue drilling expansion
Use more contractors or part-time workers to limit full-time employment expansion
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Future Work
Carrying this analysis forward
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
Future Work
Highlight demand side opportunities in Mexico to help prevent the 2020 switchover to a net importer of oilInvestigate partnerships with universities in the U.S. to learn advanced drilling techniquesEvaluate ballooning retirement costs at PEMEX and its affect on long-term financial stabilityInvestigate potential for alternative energy infrastructure in Mexico to allow PEMEX to transition to an energy market without fossil fuels
A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley
PEMEX's Future
16th largest proven oil reservesContinually decreasing reserves since 1984
Increasing possible oil reserves since 1999Technology can turn possible into proven reserves
Federal Government and PEMEX support reform and operational improvements
Energy reform in 2008 is a good step
Drilling expansion marginally successful since 2000
More reform is necessary to reverse declining trends in oil production and oil reserves